Greenlane Holdings, Inc.

Good morning, all. Welcome to today's conference call to discuss Green Lane Holdings' third quarter financial results. A press release detailing the financial results for the quarter was distributed this morning and is available on the Investor Relations section of the Green Lane website. As a reminder, today's conference is being recorded. On the call today are Aaron Locascio, Chief Executive Officer, and Bill Mote, Chief Financial Officer. Before we begin, GreenLane would like to remind listeners that today's prepared remarks may contain forward-looking statements and management may make additional forward-looking statements in response to the questions received. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties and other factors discussed in today's press release. This call also contains time-sensitive information that speaks only as of the date of this live broadcast, November 17, 2020. Factors that could cause Green Lane's results to differ materially are set forth in today's press release and in Green Lane's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. Any forward-looking statements made today on this call are based on assumptions as of today and GreenLane assumes no obligation to update these statements as a result of new information or future events. During today's call, GreenLane management may discuss non-GAAP financial measures, including adjusted net loss and adjusted EBITDA. GreenLane has included a reconciliation of these non-GAAP measures in today's press release, which is available in the Investor Relations section of our website at gnln.com. I would like to turn the conference over to Mr. Aaron Locascio, Chief Executive Officer of GreenLane. Please go ahead, Mr. Locascio.

Good morning, and thank you, everyone, for joining us today. During this call, I will review our business transformation plan, third quarter sales highlights, operating environment, and business development activities before turning the call over to our Chief Financial Officer, Bill Mote, for a detailed review of our financial results. During the third quarter, our new senior leadership team and I completed an extensive review of our business and acted on several key initiatives related to our go-forward category emphasis, organizational structure, and related staffing levels. We've taken additional decisive steps to de-emphasize certain product lines, invest in our fastest growing and highest margin opportunities, and further improve our cost structure. We remain focused on executing on our strategic vision, launching exciting new consumer products, and making the necessary positive changes throughout our organization to maintain Greenland's position as the leading platform for cannabis consumption products globally, return to profitability, and generate strong shareholder value. The steps we are taking now will reaffirm our strong foundation to capitalize on the anticipated sector growth as existing markets continue to evolve and new markets develop. Our approach is focused on four key pillars. The first focuses on increasing our higher margin revenue opportunities through our Green Lane branded products and broader assortment. The second is increasing our operational efficiencies by streamlining and optimizing our distribution platform to further reduce costs. The third is to refine our sales approach to drive customer growth. And the fourth is that we will continue to enhance and expand our platform through strategic development as well as a carefully selected M&A opportunities. Subsequent to the quarter end, we completed the transition to our new centralized and streamlined distribution model and also reduced worldwide headcount by 4.5%. In combination with other expense reductions, These decisions are expected to generate annualized savings of $5 million by the end of Q1 2020. We saw further proof that our transformation initiatives are being successfully implemented with continued diversification of our revenue mix, as well as growth in our high margin opportunities. Our core revenue grew 36% to $32.3 million in Q3 2020, compared to 23.8 million in Q3 2019. Notably, sales of our GreenLane brands grew 65% to approximately 5.6 million in Q3 2020, or 15.5% of total revenue. B2C increased to 13% for Q3 2020, compared to 3% in Q3 2019. and S&P increased 11 percent for Q3 2020 compared to 10 percent in Q3 2019. This focus on higher margin opportunities and appropriate channel mix will position us for long-term growth. On the product side, subsequent to quarter end, we obtained the exclusive right to expand the availability of Marley Naturals accessories to specialty locations in Central and South America, the Caribbean, and Europe. This is an important component of our global expansion strategy as Marley Naturals is one of our most popular brands, growing 210% compared to Q3 2019, and we are extremely pleased to bring these products to customers in new markets. We remain committed to pursuing opportunities for channel expansion and digital solutions as we continue to see a high number of customers utilizing online shopping to meet their retail demands. Online sales grew 196% for Q3 2020 compared to Q3 2019, and we anticipate that many customers that were driven online due to the ongoing pandemic will remain online shoppers when the pandemic ends. We continue to look for opportunities to improve our digital platform and create a global best-in-class customer experience. Turning to the numbers, revenue for the quarter was $35.8 million, a sequential increase of 10% compared with Q2 2020, while gross profit was approximately $2.5 million, or 6.9% of net sales. Bill will address this further in his discussion. However, I'd like to note that excluding the impact of certain inventory adjustments which were recorded in response to strategic management decisions During the quarter, gross profit would have otherwise been $7.3 million or 20.4% of net sales. As always, I want to finish by sincerely thanking our team for all their dedicated hard work as we continue to successfully execute on our strategic goals amid a challenging macro environment. We have made significant progress year to date on our transformational growth initiatives, and we look forward to ending the year solidly and entering 2021 on strong footing. With that, I'll now turn it over to Bill to run through our third quarter 2020 financial results in further detail.

Thanks, Aaron, and hello, everyone. As a reminder, the results I will be reviewing for you this morning can be found on our earnings release that is available on EDGAR and the investor relations section of our website at gnln.com. Before I begin my review of our third quarter financials, I want to provide some additional color on the improvements we have made and are making to the company. Since speaking with you last quarter, we have made substantial progress on our business transformation plan with a new COO, President, and CFO, We worked throughout August and September to craft the pathway that we anticipate will bring the business to profitability in 2021. We made strategic decisions to pivot away from certain lines of business to increase inventory velocity, margins, and turns. We also focused on swiftly selling down these de-emphasized lines to generate cash, allowing us to reinvest in more profitable third-party inventory and our own house brands. While these decisions had a negative financial impact on Q3 2020, these actions were necessary to put the company on the right course for future revenue growth and profitability. As part of our efforts to improve the financial profile of the company, we reduced worldwide staff by 4.5% in October and are implementing additional expense reductions between now and the end of Q1 2021 These reductions, along with the margin enhancing direction in inventory and sales focus, will save an annualized $5 million per year. This is in addition to the $1 million of savings that we discussed on our Q2 call. With all of these recent initiatives, we believe our path to return to adjusted EBITDA profitability in Q1 2021 is well underway. Net sales for Q3 2020 were 35.8 million compared to 44.9 million for the third quarter of 2019, a decrease of 9.1 million or 20.3 percent. This decrease was the result of the impact of our business transformation and strategic decisions made to reduce our low margin sales. We reduced our sales of nicotine products to 3.3 million, or 9.2% of net sales for the third quarter 2020, compared to 20.2 million, or 45% of net sales for the third quarter of 2019. This is an 83% reduction in nicotine-related product sales year over year. Looking specifically at our core business lines, Green Lane's core net sales grew 36% to $32.3 million compared to $23.7 million in Q3 2019. We are extremely excited to see this impact of our strategic vision. Revenues in the United States for Q3 were approximately $29 million compared to approximately $38.6 million in the same period in 2019, representing a decrease of $9.6 million or 24.9%. primarily due to a decrease in nicotine products. Revenues in Canada for the third quarter of 2020 were approximately 4.4 million compared to approximately 6.3 million in the same period in 2019, representing a decrease of 1.8 million or 29.3%. This was primarily due to COVID-19. Our European segment, which we entered last year with the acquisition of Conscious Wholesale in Q3 2019, generated revenues of approximately $2.3 million in Q3. On a sequential basis, Q3 net sales increased 10 percent from $32.4 million in Q2 2020. In Q3, gross profit was $2.5 million, or 6.9 percent of net sales, compared to $6.4 million, or 14.3 percent of net sales in Q3 2019. During the quarter, Green Lane made specific strategic decisions regarding existing inventory levels and go-forward product lines. As a result of those decisions, we decided to sell down certain inventory items, which resulted in adjustments to inventory of $3.2 million. By reducing our slow-selling inventory, we preserve warehouse space and working capital for higher-margin products, one of the key goals of our transformation initiatives. In addition, a $1.1 million reserve was made for obsolete inventory items, while we also recorded a $500,000 lower of cost or market adjustment related to a notification received from a supplier that they had taken a permanent reduction in their wholesale selling price of certain items. As Aaron mentioned, excluding the impact of these one-time inventory adjustments, Q3 2020 gross margin would otherwise have been 20.4%. This results in a gross margin improvement of 610 basis points compared to Q3 2019. Also, we incurred inefficiencies related to transitioning our warehouses that amounted to approximately 150 basis points of margin, suggesting further opportunity. I expect overall gross margin to expand from its current levels as we execute on our strategic vision with Green Lane brands at the core. Salaries, benefits, and payroll taxes in Q3 2020 decreased approximately $1.6 million to $5 million, or 23.8%, compared to Q3 2019, primarily due to a decrease in equity-based compensation expense of $2.5 million, as the company recognized a net reversal of stock comp expense of approximately $1 million during Q3 as compared to $1.5 million of stock comp expense in Q3 2019. G&A costs for the third quarter of 2020 increased approximately $5.9 million to $10.7 million compared to $4.8 million in Q3 of 2019, primarily due to a loss of $2.2 million related to a portion of an indemnification asset. This was a one-time expense. The remainder is due to an increase of approximately $900,000 in subcontractor fees, an increase of approximately $1 million in 30-party logistics expenses related to additional expenses incurred as we consolidated our distribution centers in U.S. and Canada, an increase of $800,000 in allowances for uncollectible vendor deposits incurred in connection with management's strategic initiative to improve inventory turnover, and an increase of approximately half a million in restructuring costs. Net loss for Q3 2020 was 13.8 million compared to 9 million in Q3 2019. Adjusted net loss was 6.9 million in Q3 2020 compared to 7.5 million adjusted net loss for Q3 2019. Adjusted EBITDA loss was 6.3 million in Q3 compared to adjusted EBITDA loss of 3.4 million in Q3 2019. The increase in adjusted EBITDA loss this quarter was primarily driven by an increase in G&A cost of 3.7 million in Q3 2020 as compared to Q3 2019, which increased overall net loss for the current period along with a provision for income tax expense of approximately $11 million recorded in Q3 2019 related to a full valuation allowance recorded against our deferred tax asset in the prior year. This amount represented a positive adjustment to derive adjusted EBITDA loss in Q3 2019. We remain well-funded with $40 million of cash as of September 30, 2020. compared to $47.8 million in cash as of December 31st, 2019. Year to date, our cash used in operating activities was $3.8 million as compared to $33.5 million last year. This is an 89% improvement in cash utilization. With a renewed focus on efficiently managing our cash balance, we have improved our financial stability and have the flexibility to leverage our balance sheet to execute on growth initiatives while also pursuing potential M&A opportunities. With that, I will turn the call back to the operator and open it up for Q&A.